Managing the marketing mix 309
3 Designing the message. Once the primary and
intermediate goals have been set, then
communications messages have to be
developed to achieve them. Given the
enormous volume of products competing for
the consumer’s attention, messages have to
have impact, to capture attention and to
suggest benefits that are desirable, exclusive
and meaningful. Chapters 15–18 describe the
principles of how message content and
presentation are developed to match these
requirements.
4 Deciding the communications budget. With
spending on communications routinely
representing 15 per cent or more of sales – or
double a company’s operating profits – getting
the spend right is very important. But few
managers have an idea of how to approach the
budgeting decision. Most companies use rules
of thumb such as setting the spend as a
percentage of sales, or what competitors are
spending. But the only rational way is to
estimate the amount that maximizes the net
present value of the brand’s cash flow. This is
the amount that maximizes shareholder value
(for a summary of this approach, see Doyle,
2000, pp. 308–310).
5 Allocating across communications channels. The
budget has then to be allocated across the
various communications vehicles – sales
promotion, advertising, public relations, direct
response and the sales force. Companies, even
within the same market, can employ very
different strategies. Each of the channels has its
own comparative strengths and weaknesses;
they need to be carefully integrated to get the
best out of the communications strategy.
Valuing investments in
communications
Accounting-led companies invariably under-
estimate the value of investing in communica-
tions. This is especially the case for brands
operating in mature markets, when little
growth can be expected. One problem is that it
is difficult to disentangle the effects of commu-
nications spending with the time lags involved
and the array of other factors affecting sales. So,
cuts in spending often do not appear to be
followed by losses in market share. A second
problem is that managers misunderstand the
baseline to judge communications’ effective-
ness. Managers tend to assume that if they do
not invest in communications, sales will stay at
their current level. But in mature markets, the
function of communications is often not to
increase sales, but rather to maintain them and
the price premium a strong brand normally
attracts.
Communications create shareholder value
if the present value of the brand’s cash flow is
greater with the investment than without it.
Table 11.5 illustrates how the case for advertis-
ing can be made, using an example of a leading
brand in a recessionary market. The top half
forecasts cash flows when the client maintains
the £2 million ad budget. The recession is
predicted to cut sales by 5 per cent to £20
million in the next 2 years, after which sales are
forecast to return to the previous level and then
grow with the market at 1 per cent annually.
The effective tax rate is taken to be 30 per cent,
the cost of capital 10 per cent, and net invest-
ment is 40 per cent of sales. Over the 5 years the
brand is forecast to generate cash flows with a
present value of £3.9 million. The value of the
business under this strategy of a maintained ad
budget is £10.8 million.
The lower part of the table shows what
happens if advertising is cut from £2 million to
£1 million. The short-term advertising elasticity
is assumed to be 0.2 (typical of a strong brand)
and there are diminishing lagged effects over
future periods as the brand loses saliency in the
minds of consumers. Sales decline steadily over
the forecast period, by 14 per cent in the first
year, 5 per cent in the second, and almost 3 per
cent in the third year. After the first year, profits
and then cash flow follow downwards. While
the immediate effect of the ad cut is indeed to
increase profits by £200 000, the real effect is a
major decline in shareholder value by £2.8
million, or 26 per cent. If this were an inde-